How do my wife and I avoid paying any tax on our £22,700 pension income legally?

My wife and I receive the following state pensions: £6,223 a year for my wife and £10,804 a year for myself.

I also have a SIPP (self-invested personal pension) from which I have previously taken the allowable tax-free sum. However, this SIPP can provide an additional income of £5,700 a year, giving a potential total income of £22,727 a year.

Given that the current taxable personal allowance is £11,500 a year, what options are there for us to legally avoid paying any tax?

Are we able to share each others taxable allowances? If possible, how do we go about it? We are both in our mid to late 60s.

Pension income: How do couples minimise their tax bill legally in retirement?

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HOW THIS IS MONEY CAN HELP

Steve Webb replies: There are several tax allowances in addition to the standard personal allowance of £11,500 which may be relevant in your situation or to others with money to invest.

I should stress though that I am not advocating a particular course of action for you, but hopefully providing helpful factual information that will inform your own decision making.

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

The first allowance that you could claim is the 'Marriage Allowance', which was introduced with effect from 2015-16.

This is not to be confused with the old 'Married Couple’s Allowance' which only applies now to the oldest married couples, those with one partner born before 6th April 1935.

The basic idea of the Marriage Allowance is that your wife (as the lower earner) could transfer 10 per cent of her personal allowance to you as her husband, provided she is not using it herself.

This would increase your personal allowance from £11,500 to £12,650. You can read more about the Marriage Allowance and how to apply here.

Further good news is that, provided you were eligible, you can make a backdated claim for 2015/16 and 2016/17 and potentially receive a cheque for a tax refund for each of those years from HMRC.

The second allowance to be aware of is the 'Personal Savings Allowance', which was introduced in April 2016. This allows standard rate taxpayers to earn £1,000 per year in income from savings without paying tax.

This is separate to your main personal allowance. The definition of savings income includes interest on investments.

This would not apply if you were to buy an annuity with the money left in your SIPP, but if you still have any of your tax-free cash left and have it invested in interest-bearing accounts, you should not have to pay tax on that interest.

You can read a factsheet on the how the Personal Savings Allowance works here.

A third recently introduced allowance is the Dividend Allowance. Again, this might be relevant if you have invested any of your tax-free cash in stocks and shares outside an Isa.

This allowance is currently set at £5,000 for the financial year 2017/18 though is due to be cut to £2,500 for the year 2018/19.

Any income from dividends up to the level of the Dividend Allowance would not be subject to income tax. Again, this is a separate and additional allowance to your main personal tax allowance. You can read more here.

From the figures that you have given, your wife currently has around £5,277 per year in unused personal allowances.

Even if she were to transfer £1,150 to you, this would still leave her a little over £4,000 in unused allowance.

This would be of no use if all of your investment income was in your name. But if you were to transfer any other assets to her name (and ownership) then this would help to use up some of this remaining unused allowance.

In addition, she is entitled to a personal savings allowance and a dividend allowance in her own right.

You will probably have to pay some tax because the money left in your SIPP is in your sole name and has not yet been taxed.

Because your state pension uses up most of your personal allowance, you are still likely to have to pay some tax on SIPP withdrawals, though the less you take out each year, the less of any withdrawal will be above the tax threshold.

However, taking advantage of the marriage allowance each year is likely to reduce your tax bill.

ASK STEVE WEBB A PENSION QUESTION

Former Pensions Minister Steve Webb is This Is Money's Agony Uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.

Steve will do his best to reply to your message in a forthcoming column, but he won't be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message - this will be kept confidential and not used for marketing purposes.

If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0300 123 1047.

Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here.It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.

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